Md. Gen. Hosp., Inc. v. Thompson

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
(cid:252)

No. 01-2012

MARYLAND GENERAL HOSPITAL,
INCORPORATED, d/b/a Transitional
Care Center,

Plaintiff-Appellant,
v.
TOMMY G. THOMPSON, SECRETARY,
UNITED STATES DEPARTMENT OF
HEALTH AND HUMAN SERVICES,
Defendant-Appellee. (cid:254)

(cid:253)

Appeal from the United States District Court
for the District of Maryland, at Baltimore.
William M. Nickerson, Senior District Judge.
(CA-00-221-WMN)

Argued: May 7, 2002

Decided: October 9, 2002

Before WILLIAMS, TRAXLER, and GREGORY, Circuit Judges.

Vacated and remanded with instructions by published opinion. Judge
Traxler wrote the majority opinion, in which Judge Williams joined.
Judge Gregory wrote a dissenting opinion.

COUNSEL

ARGUED: Carel Theilgard Hedlund, OBER, KALER, GRIMES &
SHRIVER, P.C., Baltimore, Maryland, for Appellant. Paul Edwin

MARYLAND GENERAL HOSPITAL v. THOMPSON

Soeffing, Office of the General Counsel, Centers for Medicare and
Medicaid Services Division, UNITED STATES DEPARTMENT OF
HEALTH AND HUMAN SERVICES, Baltimore, Maryland, for
Appellee. ON BRIEF: James E. Edwards, OBER, KALER, GRIMES
& SHRIVER, P.C., Baltimore, Maryland, for Appellant. Alex M.
Azar, II, General Counsel, Sheree R. Kanner, Associate General
Counsel, Henry R. Goldberg, Deputy Associate General Counsel for
Litigation, Marcus H. Christ, Jr., Office of the General Counsel, Cen-
ters for Medicare and Medicaid Services Division, UNITED STATES
DEPARTMENT OF HEALTH AND HUMAN SERVICES, Balti-
more, Maryland; Thomas M. DiBiagio, United States Attorney,
Roann Nichols, Assistant United States Attorney, Baltimore, Mary-
land, for Appellee.

OPINION

TRAXLER, Circuit Judge:

Maryland General Hospital (“MGH”) appeals from the district
court’s order upholding the decision of the Secretary of Health and
Human Services to deny MGH a “new provider” exemption to the
Medicare program’s caps on reimbursement for routine service costs.
See 42 C.F.R. § 413.30(e) (1996).1 We vacate the district court’s order
and remand with instructions for the court to enter judgment in favor
of MGH.

Under the Medicare program, skilled nursing facilities (“SNFs”)
are entitled to reimbursement from the federal government for the rea-
sonable costs of providing services to Medicare patients. See 42

1When this action commenced, the “new provider” exemption was
found at 42 C.F.R. § 413.30(e) (1996); it is now found, in slightly revised
form, at section 413.30(d) (2001). The references in this opinion to sec-
tion 413.30 are to the 1996 version of the regulation.

MARYLAND GENERAL HOSPITAL v. THOMPSON

U.S.C.A. § 1395x(u), (v)(1)(A) (West Supp. 2002). There are, of
course, numerous exceptions to and limitations on that reimburse-
ment, including certain caps imposed on the reimbursement for rou-
tine service costs. See 42 U.S.C.A. § 1395yy(a) (West Supp. 2002).
Congress, however, has expressly authorized the Secretary to estab-
lish appropriate exemptions and adjustments to these limits on routine
costs. See 42 U.S.C.A. § 1395yy(c) (West Supp. 2002). One such
exemption established by the Secretary is the exemption for new pro-
viders of skilled nursing services, which allows higher reimbursement
rates for the first two years of operation. See 42 C.F.R. § 413.30(e).
The new provider exemption thus “allow[s] a provider to recoup the
higher costs normally resulting from low occupancy rates and start-up
costs during the time it takes to build its patient population.” Paragon
Health Network, Inc. v. Thompson, 251 F.3d 1141, 1149 (7th Cir.
2001) (internal quotation marks omitted)).

The establishment and operation of skilled nursing facilities and
other health care facilities in Maryland, as in most states, requires
navigation through a complex maze of statutes and regulations. But
for purposes of this case, it suffices to say that a “certificate of need”
is required for the operation of a skilled nursing facility, and the cer-
tificate of need limits the number of beds that the facility may oper-
ate. Under certain circumstances, however, facilities in Maryland
have the right to put as many as 10 additional beds into operation,
without acquiring a new certificate of need. See Md. Code Ann.,
Health-Gen. II § 19-120(f), (h)(1), (h)(2)(i) (Supp. 2001). These addi-
tional beds are generally referred to as “waiver beds.” See Brief of
Appellant at 5, n.3.

In 1994, MGH established the “Transitional Care Center,” a
hospital-based skilled nursing facility. Prior to that time, MGH had
not operated such a facility. To get the Transitional Care Center up
and running, MGH purchased from three skilled nursing facilities the
right to operate 24 beds. The facilities from which MGH purchased
the bed rights were not connected or related to MGH in any way. The
contracts between MGH and the selling facilities anticipated that the
beds being sold to MGH would be “operational” beds—that is, beds
that were in use by the selling facilities and authorized by their certifi-

MARYLAND GENERAL HOSPITAL v. THOMPSON

cates of need. But when the Maryland Health Resources Planning
Commission approved the transaction, it characterized the transaction
as involving the transfer of waiver beds rather than operational beds.

MGH thereafter applied for the “new provider” exemption. After
going through several layers of review within the Department of
Health and Human Services, MGH’s request was denied. MGH then
sought review of the Secretary’s decision by the district court. See 42
U.S.C.A. § 1395oo(f)(1) (West Supp. 2002) (providing for judicial
review of final reimbursement decisions by the Secretary). On cross-
motions for summary judgment, the district court concluded that the
Secretary’s decision was based upon a reasonable interpretation of
section 413.30(e). The court therefore denied MGH’s motion and
granted the Secretary’s motion. This appeal followed.

II.

The Medicare Act specifies that judicial review of reimbursement
decisions is to be governed by the familiar standards of the Adminis-
trative Procedure Act. See 42 U.S.C.A. § 1395oo(f)(1). Under the
APA, a court must “hold unlawful and set aside agency action, find-
ings, and conclusions found to be . . . arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law.” 5 U.S.C.A.
§ 706(2)(A) (West 1996). When the question before the court is
whether an agency has properly interpreted and applied its own regu-
lation, the reviewing court must give the agency’s interpretation “sub-
stantial deference.” Thomas Jefferson Univ. v. Shalala, 512 U.S. 504,
512 (1994). But “[d]eference, of course, does not mean blind obedi-
ence,” Garvey v. NTSB, 190 F.3d 571, 580 (D.C. Cir. 1999), and no
deference is due if the agency’s interpretation “is plainly erroneous or
inconsistent with the regulation,” Thomas Jefferson Univ., 512 U.S.
at 512 (internal quotation marks omitted).

The new provider exemption is fairly straightforward. It provides
that

MARYLAND GENERAL HOSPITAL v. THOMPSON

[e]xemptions from the limits imposed under this section
may be granted to a new provider. A new provider is a pro-
vider of inpatient services that has operated as the type of
provider (or the equivalent) for which it is certified for Med-
icare, under present and previous ownership, for less than 3
full years. . . .

42 C.F.R. § 413.30(e). Section 413.30(e) does not define “provider,”
but the structure and wording of the regulation suggest that the pro-
vider is the business entity or institution providing the skilled nursing
services. This reading is consistent with the meaning attached to a
similar term in another part of the Medicare Act. See 42 U.S.C.A.
§ 1395x(u) (defining “provider of services” as “a hospital, critical
access hospital, skilled nursing facility, comprehensive outpatient
rehabilitation facility, home health agency, [or] hospice program”).
This business-entity-specific reading of the regulation is also sup-
ported by the explanation of the “new provider” exemption contained
in the version of Medicare’s “Provider Reimbursement Manual”
(“PRM”) in effect at the time MGH purchased the beds:

A new provider is an institution that has operated in the
manner for which it is certified in the program (or the equiv-
alent thereof) under present and previous ownership for less
than 3 full years. For example, an institution that has been
furnishing only custodial care to patients for 2 full years
prior to its becoming certified as a hospital furnishing cov-
ered services to Medicare beneficiaries, shall be considered
a “new provider” for 3 full years from the effective date of
certification. However, if an institution had been furnishing
hospital health care services for 2 full years prior to its certi-
fication, it shall only be considered a “new provider” in its
third full year of operation, which is its first full year of par-
ticipation in the program.

Although a complete change in the operation of the institu-
tion, as illustrated above, shall affect whether and how long
a provider shall be considered a “new provider,” changes of
the institution’s ownership or geographic location do not in
[themselves] alter the type of health care furnished and shall

MARYLAND GENERAL HOSPITAL v. THOMPSON

not be considered in the determination of the length of oper-
ation.

PRM § 2604.1 (emphasis added). These repeated references to an “in-
stitution” indicate that application of the new provider exemption
depends upon the ownership and operation of the business entity that
is providing the skilled nursing services. There is no dispute that nei-
ther MGH nor any previous owner of MGH had provided inpatient
skilled nursing services before the Transitional Care Center was
established. Thus, it would appear that MGH meets the requirements
for a “new provider” as set forth in 42 C.F.R. § 413.30(e).

The Secretary, however, insists that MGH is not a new provider
because the “waiver beds” were previously owned by unrelated
skilled nursing facilities that had been operating for more than three
years. According to the Secretary, MGH’s Transitional Care Center

was created by purchasing the right to operate nursing home
beds formerly held by three existing SNFs. Thus, a change
of ownership of these 24 beds created [the Transitional Care
Center]. Under the Secretary’s rules, one must look to
whether the past owner of these beds operated as a SNF for
three or more years. . . . There is no dispute that each of the
prior owners of these beds operated as an SNF for more than
three years. Therefore, MGH does not qualify for an exemp-
tion to the cost limits.

Brief of Appellee at 26 (internal quotation marks omitted).

We find this argument to be rather remarkable. Section 413.30(e)
quite plainly focuses on the “newness” of the provider institution
itself, a reading with which the Secretary purports to agree. See Brief
of Appellee at 25 (stating that when determining whether the new
provider exemption is applicable, the Secretary “looks at the opera-
tion of the institution under both past and present ownership as
required by the regulation” (emphasis added)). When applying the
exemption in this case, however, the Secretary has not focused on the
“newness” of the institution providing the services, but has instead
focused on the “newness” of one particular asset of that institution.
Such an approach could be sustained only if section 413.30(e) were

MARYLAND GENERAL HOSPITAL v. THOMPSON

ambiguous and the Secretary’s interpretation reasonable. See Martin
v. Occupational Safety & Health Rev. Comm’n, 499 U.S. 144, 150-51
(1991) (“In situations in which the meaning of regulatory language is
not free from doubt, the reviewing court should give effect to the
agency’s interpretation so long as it is reasonable.” (internal quotation
marks and alteration omitted)).

The Secretary points to Paragon Health Network, Inc. v. Thomp-
son, 251 F.3d 1141 (7th Cir. 2001), in which the Seventh Circuit
found the term “provider” as used in section 413.30(e) to be ambigu-
ous. In that case, Paragon Health Network, Inc. opened a new skilled
nursing facility and transferred the rights to operate 35 beds from
another Paragon-owned skilled nursing facility. The Seventh Circuit
concluded that “provider” was ambiguous as used in section 413.30(e)
because it might sometimes be difficult to determine when certain
internal changes to an institution would be enough to give rise to a
“new provider”:

[I]f a facility fires all its staff and hires a new one, but
makes no other changes, an ordinary user of the English lan-
guage probably would consider the SNF with the new staff
to be the same “provider” as it was before. Similarly, a SNF
that replaced all of its old equipment with new models
would still be the same “provider” as it was before the mod-
ernization. Even if a SNF both fired its staff and replaced all
of its equipment, one might still call it the same “provider”
if the administration and physical plant remained the same.
Of course, if all the various things that make up a SNF were
new in the sense that they had not been part of another facil-
ity, then one would have to call that SNF a “new provider.”
Conversely, if a nursing facility did not change any of its
aspects, it would unquestionably continue to be the same
provider rather than a new one. The difficulty in drawing a
line between these two extremes is what makes the word
“provider” ambiguous as used in the regulation.

Paragon, 251 F.3d at 1148. Because it found “provider” to be ambig-
uous, the court found reasonable the Secretary’s denial of the new
provider exemption based on the transfer of the beds. See id. at 1148-
50.

MARYLAND GENERAL HOSPITAL v. THOMPSON

In our view, the court’s approach in Paragon is problematic. First,
the fact that it might be difficult to draw a statutorily created line in
a case with unusual facts does not mean that ordinary terms used in
the statute suddenly become ambiguous. Moreover, as the district
court observed in Ashtabula County Medical Center v. Thompson,
191 F. Supp. 2d 884 (N.D. Ohio 2002), the difficulties that the Sev-
enth Circuit believed its hypotheticals illustrated largely do not exist
when “provider” is understood to mean the institution or facility pro-
viding the services:

Focusing on the nature of the word “provider,” the very
series of hypotheticals posed by the Seventh Circuit leads to
the conclusion that that term is unambiguous. The first three
scenarios posited by the court are examples of one institu-
tion taking certain actions that fail to create any new institu-
tion, and the court sensibly concluded that these actions
would not result in the creation of a “new provider”: “a
facility” fires all its staff and hires a new one; “a SNF”
replaces all of its old equipment; “a SNF” both fires all its
staff and replaces its old equipment, but retains the same
administration and physical plant. In each of these exam-
ples, some institution (“a facility” or “a SNF”) changes some
—maybe even many—of its characteristics, but remains in
existence as that same institution, without giving rise to any
new institution. In the court’s final hypothetical, however,
“all the various things that make up a SNF” are new, and the
court rightly concluded that such a scenario would evidence
the creation of a “new provider.” In this case, the Seventh
Circuit described not just one facility that changes certain of
its characteristics but ultimately remains the same institu-
tion; rather the court put forth a scenario involving a second,
distinct entity where all the various things that make up a
SNF are new. Perhaps the old institution is gone, and per-
haps not, but that is of little consequence. The question is
whether a second, new institution—a “new provider”—has
come into existence, and in the court’s final hypothetical,
one clearly has.

Ashtabula, 191 F. Supp. 2d at 892 n.8. Because the Seventh Circuit
effectively found “provider” to be ambiguous by ignoring the ordinary
meaning of that term, we find the court’s analysis to be unpersuasive.

MARYLAND GENERAL HOSPITAL v. THOMPSON

Notwithstanding the absence of a definition of “provider,” we sim-
ply cannot conclude that section 413.30(e) is ambiguous. Given the
ordinary meaning of the word “provider” and the manner in which it
is used in the regulation, section 413.30(e) can only be understood as
focusing on the business institution that is providing the skilled nurs-
ing services. If that institution, whether under its current or prior own-
ership, has operated as a skilled nursing facility for more than three
years, then it is not entitled to the new provider exemption. If that
institution under current or prior ownership has not previously oper-
ated as a skilled nursing facility, then it is entitled to the new provider
exemption, even if the institution has purchased some of its assets
from skilled nursing facilities that have operated for more than three
years. See Ashtabula, 191 F. Supp. 2d at 893 (concluding that “the
term provider refers to the institution applying for the exemption . . .
not merely to its intangible characteristics or attributes” and holding
that a newly created facility was entitled to the new provider exemp-
tion notwithstanding the institution’s purchase of certificate of need
rights from an unrelated SNF). Because MGH under any ownership
had not previously operated a skilled nursing facility when it applied
for the exemption, we conclude that MGH qualifies as a “new pro-
vider” under section 413.30(e).2

2This conclusion is in no way dependent upon the status of the beds
purchased by MGH or upon other intricacies of Maryland’s health care
regulatory scheme. That is, because section 413.30(e) focuses on the past
and present ownership of the business institution rather than the past and
present ownership of the beds, MGH qualifies for the new provider
exemption whether or not the beds are properly classified as “waiver
beds” or operational beds and whether or not MGH would have received
a certificate of need had it sought to establish its Transitional Care Center
in some other manner. We recognize that MGH does not make this pre-
cise argument in its brief. MGH insists that it is entitled to the new pro-
vider exemption, but it also states that it would not be entitled to the
exemption if operational beds had been transferred. Nonetheless, MGH’s
appeal has adequately presented to this court the question of the correct
interpretation of section 413.30(e). MGH’s inaccurate statement of one
aspect of this purely legal question, therefore, does not affect our respon-
sibility to properly interpret the regulation. See Kamen v. Kemper Fin.
Servs., Inc., 500 U.S. 90, 99 (1991) (“When an issue or claim is properly
before the court, the court is not limited to the particular legal theories
advanced by the parties, but rather retains the independent power to iden-
tify and apply the proper construction of governing law.”).

MARYLAND GENERAL HOSPITAL v. THOMPSON

III.

In sum, we conclude that “provider” as used in section 413.30(e)
unambiguously refers to the business institution providing the skilled
nursing services. It therefore follows that the regulation permits con-
sideration of the institution’s past and current ownership, but not the
past and current ownership of a particular asset of that institution. The
Secretary’s interpretation, however, equates the ownership of an insti-
tution providing skilled nursing services with the ownership of a par-
ticular asset of that institution. Since there is no language in the
regulation that would permit the denial of the exemption because an
asset of the new institution was previously owned by an unrelated
SNF, the Secretary’s interpretation is inconsistent with the plain lan-
guage of the regulation and cannot be allowed to stand.3 See Garde-
bring v. Jenkins, 485 U.S. 415, 430 (1988) (explaining that a
reviewing court should be “hesitant to substitute an alternative read-
ing for the Secretary’s [reading of his own regulation] unless that
alternative reading is compelled by the regulation’s plain language”);
see also 5 U.S.C.A. § 706(2)(A) (requiring a reviewing court to “set
aside agency action, findings, and conclusions” that are “not in accor-
dance with law”).

3In 1997, PRM § 2604.1 was replaced by PRM § 2533.1, which is sub-
stantially different and which arguably supports the Secretary’s position.
See PRM § 2533.1(E)(1)(b) (giving as an example of when the new pro-
vider exemption should be denied a situation in which “an institution . . .
purchases the right to operate (i.e., a certificate of need) long term care
beds from an existing institution . . . that has or is rendering skilled nurs-
ing or rehabilitative services to establish . . . a long term care facility”).
Because section 2533.1 did not exist at the time of the transactions giv-
ing rise to this case, we do not believe it is applicable. Moreover, the pro-
visions of the PRM are treated as interpretive rules, see Shalala v.
Guernsey Mem’l Hosp., 514 U.S. 87, 101-02 (1995), and thus are entitled
to “some deference,” but only to the extent that they represent a “permis-
sible construction” of the relevant statute or regulation. See Reno v.
Koray, 515 U.S. 50, 61 (1995) (internal quotation marks omitted).
Because section 413.30(e) can only be interpreted to allow consideration
of the ownership of the institution seeking the new provider exemption,
and not the ownership of the beds acquired by that institution, the exam-
ple set forth in PRM § 2533.1(E)(1)(b) does not appear to represent a
permissible construction of section 413.30(e).

MARYLAND GENERAL HOSPITAL v. THOMPSON

The Secretary’s focus on the ownership of the beds may well be
reasonable when considered against the realities of the skilled nursing
industry. For example, the Secretary might reasonably believe that the
new provider exemption should be applicable only when a new facil-
ity increases the options available to the community it serves by
increasing the number of beds actually in use in that community. And
we realize that, as is implicit in the Secretary’s argument, the right to
operate beds is perhaps the most important part of a skilled nursing
facility, so that the transfer of beds takes on special significance.

Nonetheless, while the reasonableness of an agency’s interpretation
of a regulation is important if the regulation is ambiguous, an inter-
pretation that is inconsistent with the plain language of an unambigu-
ous regulation cannot be upheld simply because the interpretation,
standing alone, seems reasonable enough. If section 413.30(e) fails to
adequately address the considerations the Secretary believes impor-
tant when determining whether the new provider exemption should be
applied in any given case, then the Secretary should amend the regu-
lation; he cannot reach the desired result by interpreting the regulation
in a way wholly unconnected to the regulation’s plain language.

In this case, the Secretary’s interpretation is altogether untethered
from the plain language of the regulation. We therefore reject that
interpretation, and we conclude that MGH is entitled to the “new pro-
vider” exemption set forth in section 413.30(e). Accordingly, we
vacate the district court’s order granting summary judgment to the
Secretary, and we remand with instructions to enter judgment in favor
MGH.

VACATED AND REMANDED WITH INSTRUCTIONS

GREGORY, Circuit Judge, dissenting:

Unlike the majority, I find that the Secretary’s denial of Maryland
General Hospital’s (“MGH”) application for an exemption from cost
limits under the Medicare program was based upon a reasonable inter-
pretation of the regulation set forth in 42 C.F.R. § 413.30(e)(1996).
Therefore, I respectfully dissent.

MARYLAND GENERAL HOSPITAL v. THOMPSON

In Maryland, a hospital desiring to operate a skilled nursing facility
(“SNF”) must first secure a “certificate of need” (“certificate”) from
the Maryland Healthcare Commission (“Commission”). Md. Code
Ann., Health-Gen. I § 19-20. The purpose of the certificate is to track
and limit the State’s capacity for skilled nursing services. The Com-
mission has the authority to issue a certificate for new beds if it finds
that additional beds are needed to provide adequate care for the sur-
rounding community. As an alternative, a SNF seeking a certificate
may purchase rights to operate beds from existing SNFs. Because the
purchase of existing rights does not add to the total inventory of beds
state-wide, the Commission will issue a certificate for purchased beds
without a new finding of need.

In June 1994, MGH agreed to purchase ten beds from Villa St.
Michael, six beds from Granada Nursing Home, and eight beds from
Wesley Home (collectively “the Selling Providers”). The agreements
between MGH and the Selling Providers called for the purchase of
“operational” beds. The parties understood that the Selling Providers
were to then replenish the sold beds by exercising their rights to
“waiver” beds. On August 2, 1994, MGH submitted a certificate of
need application to the Commission to obtain approval for a 24-bed
hospital-based SNF. MGH’s certificate was approved by the Commis-
sion on July 11, 1995. For reasons not entirely clear from the record,
the Commission reclassified the purchases from the Selling Providers
as purchases of waiver beds, and the certificate was issued based on
that reclassification. MGH did not object.

II.

Section 1395oo(f), Title 42 of the United States Code, provides for
judicial review of final agency decisions on Medicare provider reim-
bursement disputes, and instructs the reviewing court to apply the rel-
evant provisions of the Administrative Procedure Act (“APA”). Under
the APA, agency action may be set aside only if it is “arbitrary, capri-
cious, an abuse of discretion, or otherwise not in accordance with
law.” 5 U.S.C. §§ 706(2)(A); see Citizens to Preserve Overton Park,
Inc. v. Volpe, 401 U.S. 402, 413-15 (1971). The Secretary’s interpre-
tation of his own regulation is entitled to substantial deference, and

MARYLAND GENERAL HOSPITAL v. THOMPSON

“must be given controlling weight unless it is plainly erroneous or
inconsistent with the regulation.” Thomas Jefferson Univ. v. Shalala,
512 U.S. 504, 512 (1994) (internal quotation marks and citations
omitted).

III.

As required by the regulation, the Secretary considers the “previous
ownership” of the certificates in determining the length of time a pro-
vider has “operated.” 42 C.F.R. § 413.30(e) (1996). If the prior owner
was providing equivalent services, and the potentially new provider
was established through the transfer of some portion of the certificate
rights underlying those services, the operating history of the prior
owner “from which any [certificate of need] rights were obtained is
imputed to the acquiring provider.” Paragon Health Network, Inc. v.
Thompson, 251 F.3d 1141, 1145 (7th Cir. 2001). The Secretary main-
tains that certificate rights are such an integral part of SNF operations
that the transfer of these rights is considered to be a “change in own-
ership,” referred to by the Secretary as a “CHOW,” rather than the
creation of a new provider. See PRM § 1500.7. Because Villa St.
Michael, Granada Nursing Home, and Wesley Home operated skilled
nursing facilities since June 1, 1989, July 1, 1989, and May 7, 1996,
respectively, MGH’s length of operation under the regulation
exceeded three years, requiring the denial of new provider status.

As a general matter, MGH accepts the reasonableness of the Secre-
tary’s approach to interpreting the regulation. Furthermore, MGH
concedes that insofar as the Secretary’s interpretation applies to “op-
erational” beds, the interpretation is reasonable and entitled to defer-
ence. See Appellant’s Br. at 35, 36 n.12, 38-39.1 Thus, the sole issue
before the Court is MGH’s insistence that the Secretary’s interpreta-
tion cannot be extended to waiver beds.

1The majority would ignore this critical concession by MGH. See
Majority Op. at 9 n.2. Generally, concessions made by litigants are bind-
ing on appeal. See Hagan v. McNallen (In re McNallen) 62 F.3d 619,
625 (4th Cir. 1995). Thus, the Court errs in scrutinizing an interpretation
of the Secretary that MGH has elected not to challenge.

MARYLAND GENERAL HOSPITAL v. THOMPSON

In making its challenge, MGH focuses on the word “operated” in
the regulation. Since waiver beds, by definition, are not currently
operating, MGH contends that the beds have not “operated” for three
years. In essence, MGH equates the state-law category of “opera-
tional” with the federal requirement that the provider have “operated”
for less than three years. MGH argues that there could not have been
a CHOW because the Selling Providers’ licenses were unaffected by
the transfer.

The Secretary responds that MGH has misread the word “operated”
in the regulation. The issue, of course, is not whether the specific beds
operated for less than three years, but whether the “provider” operated
for less than three years. Yet the focus on bed rights, according to the
Secretary, is an attempt to infuse the undefined term “provider” with
meaning. The bed rights are the critical link between two otherwise
separate entities, and it is this link that gives rise to continuity of “pro-
vider” status. Thus, it is irrelevant that the beds had not previously
been “operated.” As for MGH’s assertion that there has been no
change in ownership, the Secretary argues that the impact of the trans-
fer of certificate of need rights on the licensure of the Selling Provid-
ers is not the exclusive test for whether a CHOW has occurred; rather,
the Secretary looks at the entire operations of the prior owners to
determine whether a SNF was created through the purchase and relo-
cation of a portion of other, preexisting SNFs.

Ultimately, it is the Secretary’s task to give content to the term
“new provider.” Unlike the majority, I find that focusing on certificate
of need rights is a reasonable exercise of interpretive discretion. See,
e.g., Chevron U.S.A. Inc. v. Natural Res. Def. Council Inc., 467 U.S.
837, 864, 866 (1984). The Secretary’s reliance on the difference
between existing rights (operational or waiver) and newly-created
rights (based on a finding of need) supports the purpose of the new
provider exemption, which is to provide assistance in the provision of
new services by new entrants to the skilled nursing facility market.
The transfer of certificate of need rights does not result in an increase
in the overall number of beds available under the state certification
scheme. Extending the exemption under these circumstances would
therefore ill serve its underlying purpose.2

2This analysis is in accord with that of the Seventh Circuit in Paragon
Health Network, Inc. v. Thompson, 251 F.3d 1141 (7th Cir. 2001). In

MARYLAND GENERAL HOSPITAL v. THOMPSON

Given the centrality of certificate rights in defining the class of
existing service providers under state law, it is quite reasonable for
the Secretary to rely on these bed rights in giving meaning to related
federal regulations. Deference is especially warranted when “the regu-
lation concerns ‘a complex and highly technical regulatory program,’
in which the identification and classification of relevant ‘criteria nec-
essarily require significant expertise and entail the exercise of judg-
ment grounded in policy concerns.’” Thomas Jefferson Univ., 512
U.S. at 512 (quoting Pauley v. BethEnergy Mines, Inc., 501 U.S. 608,

Paragon, the Secretary found that the transfer of operational bed rights
rendered the exemption unavailable for the purchasing SNF facility. The
SNF argued that the Secretary was plainly wrong to rely on the bed
rights. The court explained the ambiguity of the term “new provider” as
follows:
[The purchasing SNF] is correct that a nursing “provider” is
composed of many different attributes, but changing one or more
of these characteristics does not mean that the SNF becomes a
different “provider.” For example, if a facility fires all its staff
and hires a new one, but makes no other changes, an ordinary
user of the English language probably would consider the SNF
with the new staff to be the same “provider” as it was before.
Similarly, a SNF that replaced all of its old equipment with new
models would still be the same “provider” as it was before the
modernization. Even if a SNF both fired its staff and replaced all
of its equipment, one might still call it the same “provider” if the
administration and the physical plant remained the same. Of
course, if all the various things that make up a SNF were new
in the sense that they had not been part of another facility, then
one would have to call the SNF a “new provider.” Conversely,
if a nursing facility did not change any of its aspects, it would
unquestionably continue to be the same provider rather than a
new one. The difficulty in drawing a line between these two
extremes is what makes the word “provider” ambiguous in the
regulation.
Paragon, 251 F.3d at 1148. The court accepted as reasonable the Secre-
tary’s interpretation that because certificate rights were a necessary and
integral feature of operating as a provider and the transfer of certificate
rights would not increase the overall amount of nursing services provided
to the community, no new provider had been established. Id. at 1149.

MARYLAND GENERAL HOSPITAL v. THOMPSON

697 (1991)). Because Medicare is such a complex, regulatory pro-
gram, this Court should decline to displace the Secretary’s policy
choices in favor of its own.

I would also find that the Secretary’s rejection of a operation-
al/waiver bed distinction is reasonable. It is of little consequence that
the transferred beds had not been made operational. Waiver beds are
available for service at the discretion of the owner of the waiver right.
The owner’s right to bring a waiver bed into operation is not signifi-
cantly different from the rights the owner holds as to all other beds.
Just as the owner may take operating beds out of service, so too can
he bring waiver beds into service.

The whole point of buying and selling bed rights is, of course, to
transfer the right to use. MGH has not demonstrated that a seller’s use
or non-use of the bed right affects the value of the right in any way.
See Maryland Gen. Hosp., 155 F. Supp. 2d at 464-65. Simply put, the
buyer values the right to use the bed, regardless of whether the bed
has been used. The fact that some operational beds may not have
actually been operated, but rather only administratively classified as
ready for operation, makes the asserted distinction between waiver
and operational beds even less persuasive.

Additionally, MGH’s own actions make clear that there is no rele-
vant or significant difference between operational beds and waiver
beds. MGH initially sought to buy operational beds from the Selling
Providers. It was only after the sale had been effectively finalized that
the Commission reclassified the sale as involving waiver beds. The
reclassification seems to have been motivated by administrative con-
venience, and did not effect a substantive change in MGH’s opera-
tions. MGH was perfectly satisfied with the reclassification at the
time, and now concedes that it would not have been entitled to the
new provider exemption had the original classification not been
changed. It can hardly be concluded that the Secretary’s interpretation
is unreasonable when MGH cannot show any substantive effect on
their operations related to the reclassification of the beds.

IV.

Congress has specifically delegated to the Secretary responsibility
for determining when exemption from routine cost limits for skilled

MARYLAND GENERAL HOSPITAL v. THOMPSON

nursing facilities is warranted. 42 U.S.C. § 1395yy(c). The Secretary
has fulfilled his obligation through regulation, 42 C.F.R. § 413.30(e),
and has sought to enforce the regulation through an interpretation that
is neither plainly erroneous nor inconsistent with the language of the
regulation. Accordingly, the Secretary’s interpretation “must be given
controlling weight[.]” Thomas Jefferson Univ., 512 U.S. at 512. I,
therefore, would uphold the Secretary’s interpretation that MGH is
not entitled to the “new provider” exemption set forth in § 413.30(e),
and affirm the district court’s order granting summary judgment to the
Secretary. Accordingly, I respectfully dissent.